Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Mr McMullan's long heralded attack on the Government over currency swaps fell
flat today. That is why he has issued a post Question Time press release making
fresh misrepresentations.

With respect to external reviews, as I said in the House: "Those reviews
all recommended the continuation of the programme."

Mr McMullan provides a selective quote from the Auditor General that refers
to "Treasury's most recent (August 1998) review of the foreign currency
benchmark target". As reported by the Auditor-General, this internal Treasury
review acknowledged some risks, but concluded that the benchmark remained valid.

Mr McMullan alleges that the Auditor-General's report says that UBS had recommended
in 1998 fundamental changes to the debt management strategy. The Auditor-General
says no such thing. If he took the time and effort to read the Auditor-General's
report he would have found the following passages:

3.37 Treasury recognises that the degree of United States dollar exposure
in the benchmark is sensitive to assumptions regarding the future volatility
of the exchange rate. In December 1996, November 1997 and August
1998, Treasury reviewed the key assumptions underpinning the benchmark recommendation
on foreign currency exposure to assess whether they continue to remain valid.

3.38 The May 1996 portfolio benchmark assumed that future exchange
rate volatility would be twice that measured between 1978 and 1996, which
reduced the target United States dollar exposure than would otherwise have
been the case. Treasury's most recent (August 1998) review noted that exchange
rate volatility had increased to 11.7 per cent per annum compared to the 1978
to 1996 historical average of 7.5 per cent per annum. However, this
remained within the assumption of 12.5 per cent exchange rate volatility underlying
the benchmark recommendation. (emphasis added)

3.39 The most recent review noted that the volatility of the exchange
rate and the risk premium on the Australian dollar (exchange rate bias) were
the key structural assumptions. Treasury concluded that there was no evidence
of a structural break in the risk premium on the Australian dollar and, although
the exchange rate had depreciated significantly and become more volatile,
the volatility remained within the range assumed in the construction of the
benchmark. Accordingly, Treasury considered there was, as of August 1998,
no reason to question the recommendation to target foreign currency exposure
of between 10 per cent and 15 per cent of the portfolio.

The ANAO finding was that:

3.41 Finding: Treasury's target of holding 10 to 15 per cent of the
debt portfolio with a United States dollar exposure is based on analysis of
the cost and risk of that exposure. This analysis is not based on short-term
views about the future path of interest or exchange rates. Inputs to this
analysis include assumptions about structural factors such as Australian dollar
risk premiums and volatility based on historical data, robustness testing
and judgement. The research recognised that the expected long-term cost reductions
could only be achieved by taking on risk associated with interest and exchange
rate movements.

And further, in para 3.43:

In the light of market developments, Treasury has reviewed the assumptions
underlying the benchmark recommendation for United States dollar exposure
on three occasions in recent years with the most recent (August 1998) review
concluding that the recommendation remained valid.

All independent reports to the Treasury supported the continuation of US$ debt
holdings with a benchmark of 10 to 15 per cent.

With respect to the UBS recommendation to split the debt portfolio, the benchmark
applies to the AOFM's net debt, ie that part of debt that remains after surpluses
and proceeds from asset sales have been applied to it. The recommendation, in
effect, was thus followed.

Mr McMullan is hopelessly muddled on this issue. He flopped today. He knows
it.